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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.
When both Citigroup and Merrill Lynch both came out with staggering losses recently, I don’t think many people were all that surprised. With the credit crisis in full swing across just about every part of the economy, the financial sector has been the hardest hit. Even after the fall of giants like Bear Stearns and Lehman Brothers, the rest of the guys left standing are still bleeding.
The difference now, of course, is that investors and analysts alike have come to expect these types of losses for the near future. But while Citigroup managed a smaller quarterly loss than was expected, Merrill missed the mark and delivered a wider loss than most analysts anticipated. The question that remains in the mind of many investors, is why?
Citigroup has had an undoubtedly dangerous year. Faced with increasing losses from collateralized debt obligations and mortgage backed securities, they brought in former hedge fund manager Vikram Pandit to help turn the company around. His job was to cut down Citigroup’s bloated operations, trim the fat, get rid of poisoned assets that were threatening to choke off the firm’s capacity to operate once and for all. Many investors and analysts weren’t convinced that Citigroup would survive at all, and the numbers showed it. In the past four quarters alone, the company has lost more than $20 billion. This most recent quarterly loss of $2.8 billion was also fueled by credit and mortgage related write downs, and was also caused by a deteriorating domestic economy.
Consumers are increasingly unable to pay their mortgage obligations, with credit card l loans in default rising 45% in the third quarter from where they were just a year ago. This forced Citi’s consumer banking and credit card businesses to swing to a steep loss this quarter as it was forced to bulk up it’s credit loss reserves. Losses related to this area are expected to increase well into 2009, according to Gary Crittenden, Citi’s chief financial officer. Definitely not good news for investors.
Yet there are some glimpses of hope for the firm’s future, according to their CEO Vikram Pandit. During the third quarter Citigroup continued to slim down it’s operations, cutting 11,000 workers as part of it’s restructuring plan. He stated that the layoffs and other improvements should help Citigroup re-establish itself as the economy stabilizes.
That’s assuming of course that the economy does in fact stabilize. Citigroup will also be getting help from the U.S. Government, with regulators recently announcing that they’ll put $250 billion into the nation’s banking systems, and they’re on the list of nine major financial institutions that will receive the funding. Citigroup stated that they’ll use the money to strengthen their capital position and consider using it for acquisitions of other ailing financial institutions.
Merill Lynch is on much different footing than Citigroup, however, which goes into explaining why they came out with a wider loss than what analysts were hoping for recently. It’s about to be folded into Bank of America, and for good reason. Like many other financial institutions, Merrill’s losses stem from mortgage backed securities, and the value of those securities continue to decline further as housing prices fall and foreclosures rise with no end in sight. It’s most recent loss clocked in at $5.2 billion, or $5.58 a share. Analysts hoped for $5.22. In total, the firm has lost $24.4 billion since the mortgage crisis got into full swing about 5 quarters ago.
While things had already looked bleak for the nation’s largest brokerage, the past few months have shown that it’s not just mortgages that are the problem. Equities have been brutally knocked down as well in recent weeks and as a result clients pulled out about $3 billion from Merrill, prompting further losses.
Merrill Lynch’s salvation came once it became clear that the firm could not survive on it’s own. The firm went looking for buyers rather than face bankruptcy, and they found one in Bank of America. Combined the acquisition will form one of the largest financial service companies in the nation, and in preparation for the sale Merrill has been desperately trying to dump it’s increasingly toxic mortgage assets. It’s cut down it’s exposure in subprime mortgages by 71% and cut it’s exposure to alt-a mortgage securities as well.
Combined, Bank of America and Merrill Lynch will also receive $25 billion in capital from the federal government.
Despite one firm coming out better than expected and the other coming out worse, investors seemed unhappy with both events. Both Merrill Lynch and Citigroup stocks were down, with both firms’ shares down just under five percent this afternoon.
Last 3 posts by Morgan
- Subprime Bananas - June 28th, 2009
- Roubini: No confidence in government exit strategy - June 24th, 2009
- Goldman bonuses largest in firm's 140-year history - June 21st, 2009
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